Taming the Digital Giants: Thinking About a Multilateral Solution

[Alessandro Marinaro is an incoming second-year Master candidate in International Law at the Graduate Institute of International and Development Studies, in Geneva, currently working as a research and evaluation intern at the Joint Inspection Unit of the United Nations System.]

Introduction

The range of unique regulatory challenges arising from the digitalisation of the economy and the presence of multinational tech giants needs to be addressed with global normative solutions. Though it might seem overambitious, the most effective, comprehensive, and potentially most inclusive global solution would be a “traditional” multilateral treaty under public international law. There is more than one reason to favour the winding path of classic multilateralism, which usually is longer and more uneven than the ones of transnationalism or “minilateralism”. Ironically, the case for a multilateral treaty is being supported by current “minilateral” developments, which are highlighting the urgent need for a global normative solution, and which might, in the longer term, lay the foundations of a multilateral lawmaking process. This piece examines those developments, with a particular focus on recent initiatives on taxation in the G7 and G20 contexts.

Taming the Digital Giants: A Multilateral Solution

While many areas of internet regulation are crucial to the wellbeing and functioning of the contemporary world, one in particular can be said to stand out for its truly urgent need for global consensus and multilateralism. That one area can be broadly identified with the two key areas of competition and taxation when applied to the global digitalised economy. One of the major effects of the digital industrial revolution has been the creation of the economic giants of the 21^st century. How do these giants, Amazon, Google, Apple, Facebook, Microsoft or Alibaba differ, for instance, from the banking and oil giants of the past? Why is imposing limits upon the power of the Bezos and Zuckerbergs of today considered any different to from taming the Rothschilds and Rockefellers of yesteryear?

The answer is in the intrinsic nature of the economic environment in which the new giants operate, which is unparalleled in the extent to which it is both global and digital. These companies are able to render access to their markets virtually impossible for potential competitors, and that is only a comparatively minor proportion of their unique position of power. They can monopolise advertisements; influence consumer behaviour, preferences and decisions; collect, stock and utilise to their advantage immense quantities of consumer data and information; and reach extremely worrying levels of growth, integration, new-market penetration and dominance. Their position does not only grant them enormous economic and political power, but an unprecedented level of influence on everyday lives, a previously unseen ability to colonise the lifeworld (Felipe Gonçalves Silva, “Colonization of the Lifeworld,” in Amy Allen and Eduardo Mendieta (eds.) The Cambridge Habermas Lexicon, (2019), 36-39). This has, of course, countless implications not only on all aspects of contemporary economics and politics, but on all aspects of life.

For these reasons, competition law and taxation represent indispensable tools of regulation, which must be used in a complementary and synergic manner to pose strict limits on the ever-growing power of these actors. The urgent necessity for a multilateral treaty regarding competition and taxation in the digitalised economy emerges when one realises that the “giants” still live in a world of sovereign nation-states, jurisdictions and national borders. Ideally, such a multilateral treaty would have the same scope and breadth as the regulatory framework which was in place when the biggest company in the world was the Dutch East India Company. The existing gap between the “liquid”, borderless nature of 21^st century digitalised economy and the “solid”, territorialised nature of the state system gives companies the opportunity to exploit the absence of global consensus on regulation, finding strategies and normative loopholes to escape the scrutiny of both antitrust legislation and tax regimes.

In the case of competition, companies such as Amazon can structure themselves to take advantage of current antitrust laws, for instance, by pursuing aggressive growth over pure profit, enhancing their market power through predatory pricing (Lina M. Khan, “Amazon’s Antitrust Paradox,” 126 Yale Law Journal 564 (2016)). Online platform giants of that size can also position themselves in the market so as to serve as critical intermediaries, controlling the essential infrastructure on which their rivals depend and exploiting information collected from companies using their services to undermine them as competitors.

Most of current antitrust legislation is built around a limited understanding of “consumer welfare”, mainly based on reasonable pricing, which fails to capture predatory pricing, aggressive integration and data profiling as harmful practices by companies whose services are apparently free of charge (Khan, 2016). Furthermore, the global, de-territorialised operations of 21^st century giants are confronted with a regulatory environment where most of the work is still done by national competition authorities and courts, only occasionally and informally acting as global regulators (Anu Bradford, The Brussels Effect: How the European Union Rules the World (2020), 99-129). Attempts to create binding international rules in competition/antitrust law have not been successful, and notwithstanding increasing initiatives with regard to collaboration between competition authorities in different jurisdictions, existing transnational networks are still relatively weak.

Moreover, as concerns tax systems, the giants of the digitalised economy are well aware of how to strategically behave to take advantage of them. As recently evidenced by the OECD, the crucial factors which allow multinationals with highly digitalised business models to exploit the outdatedness of the system are, indeed, their cross‑jurisdictional scale without mass, their reliance on intangible assets (including IP) and the fact that part of their strength derives from data, user participation and IP synergies. The first two, in particular, allow them to be “heavily involved in the economic life of a jurisdiction” (OECD, 2019) without physical presence and to invest in intangibles (e.g. softwares and algorithms), which can be owned by the business itself or leased from third parties.

Tax avoidance tools such as base erosion and profit shifting (BEPS) lead to “races to the bottom”, in which multinationals shift profits to corporate tax havens, eroding the tax bases of other states. This gives rise to something very similar to a “prisoner’s dilemma”, in which states do not cooperate to the extent they could or should, even if it appears that it would be in their best interests to do so. In the current game, the only true winners are the tax-avoiding multinationals of the digitalised economy. Interestingly, however, markets may be global, but this is still a world of states, and states are the only parties with the power to create a global regulatory framework robust enough to tackle the issue effectively.

This is a challenge which cannot be sufficiently addressed through national and regional measures, nor through transnational governance in the form of loose networking and soft law. Competition and taxation in the digital era urgently need a common base of global consensus, stable cooperation and binding rules, a result that can only be reached through intergovernmental multilateralism. In short, creating an adequate global regulatory framework for the digitalised economy of the 21^st century would require the oldest, most traditional normative instrument in the quiver of public international law: a multilateral treaty.

The Case for a Multilateral Treaty on Competition and Taxation

A relevant treaty should ensure a minimum level of corporate taxation, strengthen and stabilise cooperation between different jurisdictions and reflect general changes of paradigm for the digital age in the regulation of both taxation and competition. Such an initiative could also take an institutional form, one which could be stabler and stronger than the current, rather loose network of the International Competition Network (ICN). After all, when talking about limitations to excessive market power, redistribution and fairness, the two legal regimes share some of their fundamental goals. Rules on competition and taxation should be seen as complementary tools of regulation in preventing the acquisition of undue advantages and imposing limits to the power of economic actors. They are best used in a synergic, coordinated manner, in order to maximise their combined results.

If the paradigms of corporate taxation, currently based on residence and/or permanent establishment are being updated to make them (in the words of Chancellor Sunak) “fit for the global digital age”, there is no reason to believe that the paradigms of competition law, now centred on reasonable pricing (rather than on limiting market power), should be left out of the picture There is considerable reciprocal influence between the two areas. Corporate taxation can influence the expansion strategies of tech giants, while their ability to expand across markets has direct effects on their business presence in different tax jurisdictions.

Therefore, as already noted, the regulation of taxation and competition could be more effective if planned, structured and implemented in a coordinated manner. In this regard, a possible treaty could also provide regulators with a defined framework for communication, collaboration and coordination between the two competence areas, and ensure that the paradigms which underlie both areas of regulation could have the chance of evolving at a similar pace. This is a crucial element, given that the price of uncoordinated action, between both different jurisdictions and competence areas, is generating loopholes or blind spots in regulatory frameworks; loopholes which, as previously seen, can be exploited by multinationals to their fiscal or competitive advantage.

The Winding Path from Minilateral to Multilateral

In the field of taxation regulation, recent developments seem to be pointing in the right direction, as we might be starting to see how the scope and substance of a multilateral treaty could look. In London, on June 5, the members of the Group of 7 (G7), the exclusive club composed by the wealthiest liberal democracies in the world struck an historic deal with the objective of fighting tax avoidance by multinationals. Subsequently, the deal has been supported and rubber-stamped by G20 finance ministers and central bankers in Venice, under the auspices of the OECD. The OECD itself confirmed that 131 countries are currently backing the global tax reform. The deal might be the beginning of an effective, global regulatory solution to the previously outlined “prisoner’s dilemma” holding back cooperation between states at the multilateral level.

What happened in the contexts of  the G7 and G20 is extremely important for several reasons. Firstly, members managed to find common ground to tax multinationals in the countries where they have business activities and earn profits (“Pillar One” of the initiative), with the nexus between jurisdictions and multinationals being represented by taxable digital presence (which can be measured in terms of revenues, users or business contracts). That would hopefully tackle the already mentioned issue of cross-jurisdictional scale without mass. Secondly, members also agreed to a global minimum corporate tax rate of at least 15% to avoid “races to the bottom”, with countries undercutting each other to attract multinationals (“Pillar Two”). That would finally indicate that a cooperative solution to the game theory problem of global taxation is possible, and most importantly, signal that there is the political will to do so.

The final agreement is expected to arrive in October, at the G20 leaders’ summit which will be taking place in Rome. It is beyond that step that the project could really start taking the shape and dimensions of a multilateral solution. After all, the determination of G7 members in taking the route towards global consensus had already been evidenced as early as in May, for example, in the remarks of EU Commissioner Paolo Gentiloni and then, during the G7 itself in June.

Including competition in the scope of the agreement would have probably been overambitious. However, that does not mean that an eventual treaty should not cover antitrust matters. It remains an ambitious goal, but not doing that would probably be a mistake or, at least, a missed opportunity to further build on the momentum created by unique historical circumstances to lay the foundations of a more institutionalised global framework for both antitrust and taxation cooperation.

Conclusion

Notwithstanding the historical significance of the moment, we should not commit the error of being too optimistic. For one, the G7/G20 agreements presents various problematic features, beyond the omission of any issues relating to competition. In particular, as voiced by many, the agreed-upon minimum tax is still too low, and it reflects the trade-offs and compromises needed for coordinated international action on matters such as taxation. However, even keeping in mind that the agreement is only a first step, the G7/G20/OECD agreements could still act as the kernel around which to develop a multilateral treaty, preferably moving latter stages of any negotiations to a more global and multilateral forum such as the United Nations. This step would be vital to the inclusiveness, credibility and effectiveness of any global solution worth of this name. A UN-assisted multilateral treaty would not only ensure that all other countries could have their say, beyond just the major advanced and developing economic powers, but also secure the binding nature of any eventual disciplines arising from such a treaty. As in the case of the Covid-19 pandemic, imposing limits upon the power of digital giants requires a global solution, not a national, regional or “minilateral” one. It is either global, or not a solution at all.